July 30 (Bloomberg) -- Former Federal Reserve Chairman Alan
Greenspan said equity markets will see a decline at some point
after surging for the past several years.

“The stock market has recovered so sharply for so long,
you have to assume somewhere along the line we will get a
significant correction,” Greenspan, 88, said today in an
interview on Bloomberg Television’s “In the Loop” with Betty
Liu. “Where that is, I do not know.”

While Greenspan said he didn’t think equities were
“grossly overpriced,” his comments come amid growing concern
that interest rates near record lows are creating asset-price
bubbles. Fed Chair Janet Yellen said in July 16 congressional
testimony that while she saw signs of high valuations in some
markets, prices overall -- including for U.S. stocks -- weren’t
out of line with historical norms.

The Standard & Poor’s 500 Index has gained 17 percent in
the past year and almost tripled since March 9, 2009, its low
point during the financial crisis. The benchmark index fell 0.1
percent to 1,967.88 in New York at 10:51 a.m.

Forty-seven percent of financial professionals said the
equity market is close to unsustainable levels while 14 percent
already saw an asset-price bubble, according to the quarterly
Bloomberg Global Poll conducted July 15-16.

Greenspan said he measures stock valuations by looking at
their rate of return over sovereign debt yields.

‘Exceptionally High’

“I would say that’s closer to normal after being
exceptionally high, and that means we are not yet in a stressful
position,” Greenspan said. He served as chairman of the Fed for
more than 18 years, stepping down in 2006.

Yellen said in semi-annual testimony that the Fed must
press on with monetary stimulus as “significant slack” remains
in labor markets and inflation is still below the Fed’s goal.
The Federal Open Market Committee is scheduled to release a
policy statement at 2 p.m. today in Washington.

Even if Yellen agreed that bubbles were emerging, she’s
expressed doubt monetary policy can do much to stop them.

“Monetary policy faces significant limitations as a tool
to promote financial stability,” Yellen said July 2 at the
International Monetary Fund in Washington. “A macroprudential
approach to supervision and regulation needs to play the primary
role.”

In testimony before the House Financial Services Committee,
Yellen said valuations “appeared stretched” in some sectors.
She identified lower-rated corporate debt as an area the Fed is
closely monitoring.

Financial Stability

“The committee recognizes that low interest rates may
provide incentives for some investors to reach for yield,” she
said. “My general assessment at this point is that threats to
financial stability are at a moderate level and not a very high
level.”

Greenspan said U.S. economic growth, along with a
tightening labor market, “are indicating that at this stage we
will run into upside pressures in the money markets and
inflation sooner than most of us had expected.”

Gross domestic product rose more than forecast in the
second quarter, at a 4 percent annualized rate, the most since
the third quarter of 2013, after shrinking 2.1 percent from
January through March, Commerce Department figures showed today.

Still, he worried that long-term capital investments had
slumped, potentially undermining the recovery.

“The capital stock is growing far less than we would have
thought it should at this stage,” Greenspan said. “That, in
turn, tells us that productivity is going to have difficulty
accelerating.”

Defense Needs

The former Fed chairman also said future government
spending, potentially driven by increased defense needs and by
global warming, could put pressure on the U.S. budget, with
implications for the dollar.

“The dollar is held in such extraordinary esteem around
the world. It’s the ultimate source of value,” he said. “We
may not be able to continue if we are going to follow the fiscal
road we are currently on.”

Greenspan said he believed oil prices would drop $15 to $20
per barrel if not for unrest in the Middle East.

“We have a very significant amount of excess capacity and
slack,” he said. “There is an essential premium in the
market” caused by questions over whether long-term supplies are
secure.